Coinbase is caught in a "rat trading" storm. I found clues from the financial report

Coinbase, known as the "first stock of cryptocurrency exchange", seems to be pulling down its pedestal with its image of being upright and self-disciplined in the industry.

Rat trading is a term for stock speculation, which refers to the behavior of bankers using their own funds (traders and their relatives and relatives) to buy stocks at low prices before using public funds to push up stock prices, and then selling their personal positions first to make a profit after the stock price rises. This behavior is called "trading with undisclosed information" in the securities law, and is considered a "trading crime" in the Criminal Law. In the crypto industry, there is obviously no such thing as a "trading crime."

Recently, before the announcement of Coinbase's coin listing, there have been many cases of premature price increases of crypto assets. This has led to people suspecting that some members of Coinbase were secretly building "rat warehouses", exposing huge loopholes in Coinbase's coin listing process.

In response to the Coinbase "insider trading" issue, Daxing has compiled detailed information on the price changes of some of the currencies listed on Coinbase.

We take the time of Coinbase's announcement as the starting point (first disclosure), and trace back the cumulative increase within 1 day, 3 days, and 7 days respectively. From the table, we can see that crypto assets such as REQ/NKN have increased by more than 50% one day before the announcement, while crypto assets like TRU/ACH/PLA have increased abnormally by about three times three days before the announcement. In the absence of major changes in the overall market environment, this increase seems a bit abrupt.

Recent price changes of some related tokens before Coinbase’s announcement

Data source: Binance & Coinmakecap, compiled by Blockchain Big Star

As we all know, when the news that a certain cryptocurrency is listed on Coinbase is first announced, it will definitely be sought after by the market in the short term. Therefore, for those who know these insider information in advance, by arranging "rat warehouses" in advance, they will have a sure-win transaction.

Interestingly, before Coinbase landed on Nasdaq (that is, before April), this situation rarely occurred. For example, on March 10 this year, Coinbase issued an announcement on the listing of Ankr, CRV, and Storj. Before the announcement, these assets did not experience abnormal large fluctuations. Only after the announcement did they experience normal increases. Going further, SNX, REN, and MANA, which were launched in 2020, did not experience the current situation.

So why did Coinbase change after its listing?

We can see some clues from the financial report. On August 10, in the second quarter financial report released by Coinbase, Coinbase announced relevant data of the platform. Among them, the monthly active trading users in the second quarter were 8.8 million, a month-on-month increase of 44%, while the total value of platform user assets decreased from US$223 billion in the previous quarter to US$180 billion, a decrease of nearly 20%. This rise and fall shows the decline in the value of a single Coinbase user.

The second is the management difficulties brought about by the increasing number of employees. Today, the number of Coinbase employees has increased from 199 at the end of 2017 to 2,176 employees as of June 30, 2021. In the second quarter of this year alone, personnel expenses increased by $61.1 million. Faced with a large number of employees around the world, if Coinbase does not make synchronous progress in management and institutional norms, then any small mistake in the listing process may lead to leaks and illegal operations. Therefore, in a sense, the "rat warehouse" incident is also a management accident within Coinbase.

Third, in addition to the decline in the value of Coinbase users mentioned above, the various data of the Coinbase platform began to decline significantly after entering the third quarter. In July, the number of monthly active trading users dropped to 6.3 million, and the transaction volume fell back to US$57 billion. In comparison, the average monthly transaction volume in the second quarter was US$154 billion, which means that the transaction volume in July dropped by nearly 60%, which is fatal for a platform that mainly relies on transaction fees. As of August 17, Coinbase's stock price was US$256 and its market value was US$54.17 billion. This company, which was previously praised by foreign media as equivalent to 100 unicorns, has lost nearly 40% of its market value since its listing.

Therefore, how to increase transaction volume and stabilize its basic market is the core issue of Coinbase. Increasing the total value of assets and maintaining the growth of the number of user groups is the most direct way, and naturally, constantly listing new coins is the best solution. Therefore, in this context, it is not difficult to understand that Coinbase is constantly accelerating the pace of listing coins, and even launched MEME assets such as DOGE and SHIBI (later postponed) at the risk of a lot of doubts.

"We will continue to expand the breadth of platform assets," this is also what Coinbase wrote in its second quarter financial report.

According to the cryptocurrency trading volume on Coinbase, Bitcoin and Ethereum accounted for 24% and 26% respectively, and other "long-tail" crypto assets accounted for half of the trading volume (about 231 billion transactions). A year ago, these "long-tail" crypto assets only accounted for 28%. In the second quarter, these "long-tail" crypto assets alone brought Coinbase 926 million in trading revenue, which to a certain extent drove Coinbase's determination to expand rapidly in coin listings.

Coinbase encrypted asset transaction volume related information data source: Coinbase second quarter financial report

At the end of June, Coinbase founder Brian Armstrong publicly said, "We are asset agnostic because we believe in the free market and that consumers should have the right to choose in the crypto economy," and said that all legal and viable cryptocurrency assets will be listed. Therefore, it is foreseeable that Coinbase will continue to maintain this rapid pace of listing coins for some time to come, and before significant improvements are made in management, the problem of "rat trading" is difficult to avoid, so some people also joked that "Coinbase is becoming more and more like Huobi."

Needless to say, Huobi was a big player in its early days. On August 12, Huobi platform announced for the first time that it would launch CLV, and two days ago, CLV had already risen by 45%. On May 5, Huobi announced that CTSI would be launched on the platform, and it rose by 37% the day before. However, compared to insider trading, everyone seems to be more concerned about Huobi's network cable.

The "insider trading" problem, at a minimum, is a failure of Coinbase's self-management, and at a maximum, it is actually a lack of norms and supervision in the entire industry.

At the beginning of this month, the amendment to the U.S. Infrastructure Act has been attracting much attention from the crypto community. The bill aims to further regulate the development of the crypto industry and address long-standing concerns from the outside world: whether the new reporting rules for cryptocurrency transactions will include exchanges and other types of potential businesses in the category of "brokers."

However, the crypto provisions in the bill, which could collect approximately $28 billion in taxes on cryptocurrencies, have drawn opposition from many institutions. The U.S. Blockchain Association, Coin Center and Coinbase have formed a policy team and used their internal relationships to try to change the wording of the bill.

Coinbase co-founder Brian Armstrong has also expressed his views on the bill many times. He tweeted that "this provision will have a profound negative impact on cryptocurrencies in the United States. If the United States does not accept innovations in the encryption field, financial innovation will become stagnant and will miss the best opportunity to promote economic growth."

From a neutral perspective, this game between supervision and capital is precisely the only way for this industry to mature and become standardized. However, supervision is often lagging behind, and simply relying on industry self-inspection is not enough. Therefore, this has also created a lot of gray areas in this field.

Even with its current development, crypto assets are still in their early chaotic stages. For this brand new financial technology industry, what "insider trading" exposes is only the tip of the iceberg of the industry's development problems. When there is an excessive lack of supervision, it will often lead to a situation where interests continue to gather at the top of the pyramid, while risk costs are continuously borne by the bottom of the pyramid. In the blockchain industry, which is characterized by freedom and geek spirit, there should be a boundary between what can and cannot be done, and this needs to be defined by supervision.